tag:blogger.com,1999:blog-1110014885778996459.post6532695560042104446..comments2018-05-24T07:13:59.248-07:00Comments on Idiosyncratic Whisk: Bank deregulationKevin Erdmannhttp://www.blogger.com/profile/07431566729667544886noreply@blogger.comBlogger12125tag:blogger.com,1999:blog-1110014885778996459.post-22865177524428142212017-02-26T09:18:24.203-07:002017-02-26T09:18:24.203-07:00Insurance against systemic risk should be a public...Insurance against systemic risk should be a public function. I agree. I like proposals that harness the risk assessment abilities of the private sector too. One concept I&#39;ve liked for bank regulation is this. X% of a bank&#39;s capital stack should come from a convertible debt security. This security would be quickly converted to equity under certain circumstances (another form of expedited Chapter 11). If the security traded publicly, then regulators could just leave alone the banks where the security was trading close to par. Right now, the banks react like lemmings to regulator guidance (which probably actually increases systemic risk). Maybe this security could be used to pay employee bonuses with a requirement that they not sell for 3 or 5 years. Maybe X% is a function of the bank&#39;s size. I want there to be FDIC insurance. I don&#39;t want to have to read a bank&#39;s financial statements before opening a checking account. Huge deadweight loss if everyone had to read bank balance sheets. But I want FDIC losses to be minimal and to be fully covered by fees paid by the banks. billnoreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-51041767663123937442017-02-25T19:37:26.630-07:002017-02-25T19:37:26.630-07:00I don&#39;t know. I mean, certainly there are exa...I don&#39;t know. I mean, certainly there are examples, like AIG, that support your point. But, I think George Selgin and Lawrence White make a decent argument, and clearly, under private insurance, capital levels would be higher and TBTF would solve itself, because an insurer would have to commit to failing if the TBTF bank failed. A bank too large would have a hard time getting insurance.<br /><br />I think it might be a step in a better direction to have public re-insurance of private insurers.<br /><br />I don&#39;t know if it will make it past review, but in the book, I argue that the GSEs should retain their guarantee business as a public utility, preferably as part of the Federal Reserve. Insurance against systematic risk should be a public function, and where there is a framework that produces exposure to systematic risk as purely as the GSE guarantee business does, it should operate as a public utility.Kevin Erdmannhttps://www.blogger.com/profile/07431566729667544886noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-44087772929768075682017-02-25T17:51:47.041-07:002017-02-25T17:51:47.041-07:00AIG and 2008 clearly showed that a private entity ...AIG and 2008 clearly showed that a private entity can&#39;t offer financial insurance for truly catastrophic financial events because correlations get too high. And if the public sector provides that insurance, it has to regulate. Side note - if the Fed implements an effective NGDPLT (which it should), then as Harry Chernoff stated, I think we will eventually have a crisis anyway and no private financial insurer would be able to survive that. Second side note - I absolutely don&#39;t want the Fed buying bad loans (unless it only buys them from me! :-)<br />LTCM is an interesting case. The Fed basically coordinated an expedited Chapter 11. That&#39;s something that our system should provide for all borrowers and lenders. That includes mortgages. billnoreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-16756674124822260452017-02-08T06:50:10.358-07:002017-02-08T06:50:10.358-07:00Kevin--
Yes I have been wondering about that too....Kevin--<br /><br />Yes I have been wondering about that too. Banks intermediate...but should they? <br /><br />But people have $10 trillion now in deposits at US banks. Could all that capital be otherwise deployed? Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-36319086243402386482017-02-07T21:14:16.457-07:002017-02-07T21:14:16.457-07:00The reason they need insurance is because there is...The reason they need insurance is because there is an asset - liability mismatch. Money market funds don&#39;t have FDIC. There was just one fund that &quot;broke the buck&quot;, right? If there wasn&#39;t FDIC, you wouldn&#39;t put short term deposits in banks, but you wouldn&#39;t have to. I don&#39;t see why unleveraged money markets couldn&#39;t invest your deposit in short term treasuries and serve the same function as banks. There are plenty of investors willing to buy RMBS (or there were). Why do we need to subsidize the system that mismatches assets and liabilities?Kevin Erdmannhttps://www.blogger.com/profile/07431566729667544886noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-12280448160509154372017-02-07T20:03:52.334-07:002017-02-07T20:03:52.334-07:00Kevin:
The People&#39;s Bank of China periodicall...Kevin:<br /><br />The People&#39;s Bank of China periodically buys bad loans, and solves the problem that way. The banking system goes forward. Probably this leads to some corruption. <br /><br />But since the PBOC is below its inflation target anyway, I guess this works. The Chinese banking system will never collapse. Westerners do not have a clue about that. <br /><br />Actually, I never thought bank bailouts were all that bad (even in the U.S.), as long as shareholders and bondholders get wiped out. Then, there are plenty of consequences for investors to a bank failure. They lose all their money. There is no moral hazard.<br /><br />I see no reason for unsophisticated depositors to lose money, which could incur bank runs. <br /><br />I suppose another bank system would be only one regulation, that banks buy deposit insurance from a licensed insurer. This might lead to something like a &quot;Big Five&quot; of national bank insurers, something like we have a Moody&#39;s, S&amp;P and Fitch today. A few recognized outfits. <br /><br />So depositors would be told they pay 1% of deposits for insurance, more at riskier banks, and less at less risky banks etc. <br /><br />But even this Big Five would have to backed up by a central bank. <br /><br />The private financial sector is built for big storms, really big storms---but not once-a-century storms. <br /><br />In any event, I agree with your assessments that regulations upon regulations and reserve requirements and stress tests and other do-goody regs like CRA probably accomplish little, and may be counterproductive.<br /><br />Curiously enough, if you go to the ABA website, they seem to have long ago accepted Dodd-Frank. <br />Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-44697884292757331852017-02-07T07:43:52.397-07:002017-02-07T07:43:52.397-07:00There are many ways for these arrangements to be m...There are many ways for these arrangements to be made. In banking, it seems like the clearinghouses of the 19th century might be a model that would work. Sort of a bank co-op. It would naturally solve TBTF because nobody would be willing to insure a bank that was too large.Kevin Erdmannhttps://www.blogger.com/profile/07431566729667544886noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-67666209253026134722017-02-07T05:18:18.832-07:002017-02-07T05:18:18.832-07:00Add on: We saw the S&amp;L tumble in the 1980s. In...Add on: We saw the S&amp;L tumble in the 1980s. Interesting story. Guys would buy a small S&amp;L, set up a boiler-room, run national ads offering highest deposit rates. Huge inflows of money. Then lend the money to friends and run away. <br /><br />AIG said they insured bonds. Well, except when bond values fall as a group. <br /><br />LTCM.<br /><br />Bear Stearns, Lehman. <br /><br />Not sure what to make of it. <br /><br />Private deposit insurance makes sense, but how to stop banks from buying insurance from fly-by-night operators? <br /><br /><br /><br />Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-9901720591506655902017-02-07T00:17:58.103-07:002017-02-07T00:17:58.103-07:00I think I agree about moral hazard and housing. Af...I think I agree about moral hazard and housing. After all, a lot of people were kicked out of their homes and lost their deposits or equity. <br /><br />I am more thinking about moral hazard on the institutional side. The ability, like LCTM, to leverage 100 to one to expand profits. <br /><br />Huge upside if you bet right, and you simply walk away if you bet wrong.<br /><br />Anyway, I agree on private financial insurance. I am just saying that ultimately the central bank has to be able to print money.Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-11784978928684906762017-02-07T00:13:52.263-07:002017-02-07T00:13:52.263-07:00I think I agree about moral hazard and housing. Af...I think I agree about moral hazard and housing. After all, a lot of people were kicked out of their homes and lost their deposits or equity. <br /><br />I am more thinking about moral hazard on the institutional side. The ability, like LCTM, to leverage 100 to one to expand profits. <br /><br />Huge upside if you bet right, and you simply walk away if you bet wrong.<br /><br />Anyway, I agree on private financial insurance. I am just saying that ultimately the central bank has to be able to print money.Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-22009945275135062472017-02-06T22:21:32.821-07:002017-02-06T22:21:32.821-07:00The distinction isn&#39;t whether deregulated mark...The distinction isn&#39;t whether deregulated markets are perfect. They can&#39;t be. The distinction is whether rules and regulations make them more safe or less safe. There are a lot of regulations that make us less safe.<br />LTCM is on them. It was a one-off situation, and it seems like it was handled well. I think the idea that moral hazard led to the housing bust is extremely over-stated.Kevin Erdmannhttps://www.blogger.com/profile/07431566729667544886noreply@blogger.comtag:blogger.com,1999:blog-1110014885778996459.post-66173697749916128612017-02-06T21:15:33.592-07:002017-02-06T21:15:33.592-07:00Great post, and deep thought-provoking observation...Great post, and deep thought-provoking observations. Well, deep by my standards. <br /><br />There might evolve a free-nmarket model in which financial institutions buy insurance, or depositors buy insurance. Think AIG, but for depositors. <br /><br />So, the private sector would insure bonds or deposits, or mortgages (PMI). <br /><br />Maybe such a model would be robust and sturdy.<br /><br />My guess is such models work until they don&#39;t (see AIG). <br /><br />If my sentiments are accurate, we could have a good private-insurance model that every 50 years or so suffers catastrophic collapse, snowballing recessions-depressions etc. <br /><br />Maybe a last-stop government back-up is needed somewhere. Keep everything private, but leave authority for a central bank to print money and buy bad loans etc. <br /><br />After a few decades of financial reporting, I wonder if financial types have the gravitas, authority, self-discipline required for a permanent financial sector. Egads, what Long-Term Capital Management managed to do--just one money manager.<br /><br />I like say to ask, &quot;Why do engineers become engineers?&quot; They love engineering and they need money. Doctors, teachers etc.<br /><br />Why do people work on Wall Street? <br /><br />They love money and they love money. <br /><br />On side note:<br /><br />“Britain has changed since 1998.<br /><br />Back then, it only took workers about three years to save enough money for a down-payment on a house. Now it takes 20 years, on average, according to the Resolution Foundation, which published a landmark report on income, housing, and inequality in Britain last week.”<br /><br />—30—<br /><br />That is from Tyler Cowen today. <br /><br />More and more, this problem of property is working its way into living costs, and our financial systems. Our banks are hugely exposed to property, which is propped up artificially by zoning. Banks love lending on property. <br /><br />Large global capital flows, migration---but rigid supplies of housing, <br /><br />Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.com